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NEC, notices of dissatisfaction and the Arbitration Act 1996

Regular users of the NEC3 ECC will be familiar with its dispute resolution provisions set out in Options W1 and W2, used depending on whether the contract is a “construction contract” and the Construction Act 1996 applies (W2), or it isn’t and it doesn’t (W1). Both Options provide for disputes to be referred to adjudication and include similar prescriptive time limits for when things have to be done by. They also both provide for the giving of a notice of dissatisfaction in the event that one party is unhappy with the adjudicator’s decision.

In March 2005, Fermanagh entered into a NEC2 Engineering and Target Contract with Gibson for the construction of a waste management facility. (It is worth noting that the relevant provisions in the NEC2 are reflected in Options W1 and W2.)

By October 2011, Gibson was on its fourteenth application for payment, claiming something in excess of £2.1 million. Fermanagh didn’t pay and, when an adjudicator awarded Gibson £2.1 million, it still refused to pay because it calculated that the sum due was nearer £300,000. Gibson went off to court and enforced the adjudicator’s decision. In the process, the court rejected Fermanagh’s arguments that the adjudicator lacked jurisdiction because there was no dispute and had breached the rules of natural justice.

So far, everything looks normal, a “run of the mill” adjudication followed by enforcement proceedings.

However, the contract provided that if a party was dissatisfied with the adjudicator’s decision, it had four weeks to give a notice of its intention to refer that matter to arbitration. Here the adjudicator’s decision was dated 23 October 2012 but Fermanagh did not give its notice until 5 February 2013. Not four weeks as the contract required (in clause 93), but something nearer to 15 weeks later. It’s no surprise that Gibson took the time bar point, or that the arbitrator who had been appointed stayed the arbitration pending the point being determined by the court.

In April 2013, Fermanagh issued court proceedings, applying to extend the time it had to refer a dispute to arbitration to 6 February 2013. It relied on section 12 of the Arbitration Act 1996.

Section 12, Arbitration Act 1996

I’m not sure how many people are familiar with section 12, but it allows a court to extend time for starting an arbitration in certain circumstances, but:

“(3) The court shall make an order only if satisfied –

(a) that the circumstances are such as were outside the reasonable contemplation of the parties when they agreed the provision in question, and that it would be just to extend time, or

(b) that the conduct of one party makes it unjust to hold the other party to the strict terms of the provision in question.”

First instance and in the Court of Appeal

The judge at first instance held that, among other things, section 12(3) applied and it was just to allow time to be extended. This was because the adjudicator’s jurisdiction had been an issue in the enforcement proceedings and the parties must have contemplated that the time bar wouldn’t run while that issue was being determined and before the substantive dispute could be referred to an arbitrator.

Quite understandably, Gibson appealed.

The Court of Appeal held that the judge at first instance was wrong. It was a question of what the parties had contemplated when they entered into the contract. In adjudication, disputes over whether there is a dispute are common, and that fact could be reasonably anticipated by the parties when they entered into the contract. Only if the situation was “unusual, out of the ordinary and unpredictable at the time the original time bar was agreed” would it be appropriate to extend the time bar.

I would think that line of reasoning should preclude parties from relying on section 12 in almost all cases where there is a construction contract and a right to adjudicate. After all, challenges to adjudicators’ jurisdiction and their decisions often follow a familiar form. As the Court of Appeal observed, “they are prone to happen”.

The Court of Appeal went on to note that Fermanagh adopted a “high risk strategy” by ignoring the adjudicator’s decision. Instead of serving a notice of dissatisfaction (or notice of intention to refer to arbitration as the judgment calls it) as the contract required, it maintained its arguments that the adjudicator lacked jurisdiction because there was “no dispute fit to go to adjudication”. This was “misconceived” and was rejected by the adjudicator and the court at first instance. It was not enough to effectively mean the requirements in clause 93 had been supplanted. Fermanagh had “failed to protect its position”, which a reasonable party properly advised would have concluded it needed to do by taking the procedural step in clause 93.

Parties need to take the appropriate procedural steps

It may seem surprising that a party would fail to protect itself by not serving a notice of dissatisfaction. If such a notice had been given in time, it could have been given without prejudice to the “no dispute” arguments that were being run in the enforcement proceedings. As the Court of Appeal observed, it would not have amounted to a waiver of Fermanagh’s claim that the adjudicator lacked jurisdiction, but would be entirely consistent with it. I guess the argument would go something like this:

“You don’t have jurisdiction as there isn’t a dispute, so we don’t owe Gibson £1.2 million, like you say. We want an arbitrator to decide what amount we do owe, if we owe anything, which we deny!”

I often find that it isn’t a lack of a notice of dissatisfaction that causes arguments, rather when a dispute is referred to arbitration, it is a question of determining those parts of the dispute that are the subject of an earlier adjudicator’s decision (and therefore the subject of a notice of dissatisfaction), from those that aren’t. One way that I have dealt with this issue when I’ve been acting as an arbitrator is to make an award on my jurisdiction on the basis that not all of the matters referred have been decided by an adjudicator.